For the past few months, bankrupt department store chain J.C. Penney (JCPN.Q) has been in a race against the clock to sell itself before the holiday season. Management and lawyers for the company fear that an extended stay in bankruptcy could cause lenders to lose patience and demand a liquidation: a fate that has befallen several other prominent retailers in recent years.
However, J.C. Penney now appears to have cleared the last major hurdle preventing a sale of its retail operations to Simon Property Group (SPG -1.03%) and Brookfield Property Partners (BPY). That's a welcome piece of good news for Simon, Brookfield, and other mall owners.
Where things stood
About two weeks ago, J.C. Penney finally filed a draft asset purchase agreement (APA) governing the terms of its sale. That key agreement had been delayed by about a month as the company struggled to settle on key terms with Simon and Brookfield.
Filing the draft APA didn't get J.C. Penney completely out of the woods, though. While Simon and Brookfield are in line to buy the company's retail operations, a group of lenders with high-ranking claims are set to receive a majority of J.C. Penney's real estate holdings: 160 stores and all of its owned distribution centers. Those assets would be leased back to the operating company owned by Simon and Brookfield.
A separate group of creditors including Aurelius Capital Management challenged that part of the reorganization plan. In colorful terms, lawyers for Aurelius' group referred to the bankruptcy plan as "economic terrorism" and "lender-on-lender violence." In simple terms, they alleged that the lenders slated to take over J.C. Penney's real estate would recover more than what they were entitled to under bankruptcy law. The Aurelius group didn't object to selling the retail business to Simon and Brookfield, but J.C. Penney's lawyers warned that it wouldn't be feasible to sell the retail business as planned without also going ahead with the real estate part of the transaction.
What just happened
There have been two important developments in J.C. Penney's bankruptcy case since last week. First, the company finalized the APA last week, keeping the sale to Simon and Brookfield on track. Second, J.C. Penney's warring lender groups announced on Monday that they had reached a settlement.
As things stand now, the key stakeholders appear to agree on the path that J.C. Penney should take. Barring any unforeseen setbacks, Simon and Brookfield will complete their purchase of the iconic department store chain no later than Nov. 20: one week before Black Friday.
It will take a little longer for J.C. Penney (the corporate entity) to finalize the sale of its real estate to the lenders and exit bankruptcy. That's expected to happen in 2021. However, it shouldn't have a noticeable impact on the operations of the retail business. (Of note, J.C. Penney shares are likely to be canceled and declared worthless at the end of the bankruptcy proceeding.)
Mall owners can breathe a sigh of relief
There hasn't been much good news for mall owners lately. The COVID-19 pandemic caused a huge spike in store closures and tenant bankruptcies. This led two major mall REITs that had been struggling with high debt prior to the pandemic to file for bankruptcy last weekend.
A liquidation for J.C. Penney -- which serves as a major anchor tenant for most mall owners -- would have made things even worse. In the current environment, it would take a long time to find replacement tenants for its stores. And in any case, few mall owners could afford the substantial cost of reconfiguring that real estate for new tenants in the near future.
Simon Property Group and Brookfield Property Partners shareholders should be pleased that the deal is nearing the finish line. Together, the two mall owners are investing just $300 million of cash in J.C. Penney: a fraction of what they would have to spend to replace all of the JCPenney stores in their portfolios. Thus, the downside risk for Simon and Brookfield is modest relative to the upside potential if J.C. Penney CEO Jill Soltau can return the business to profitability over the next few years.
The J.C. Penney rescue deal could be even better news for other mall owners. They haven't had to put up any cash to save the ailing retailer, and they will still reap the benefit of keeping a major anchor open and paying rent in 2021 and beyond.